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The Ultimate Hedge Against Political Chaos

With Congress stuck in a political deadlock, the U.S. government still partially closed, and the nation on the verge of a possible debt default (TLT - News), what's been the one asset that's proven to be the single best hedge?

While most Wall Street pundits were dismissing the significance of stock market volatility, we told our readers that owning volatility or VIX was an ideal way to capitalize on the chaotic state of affairs. And since then, the VIX has effortlessly outperformed virtually all other investments.

Over the past month, the CBOE S&P 500 Volatility Index (^VIX) has surged 25% while the S&P 500 (SPY - News) has remained flat. Interestingly, gold (GLD - News) even managed to lose 2%, which shows its hedging ability against political mayhem has badly failed.

In our October ETF Profit Strategy Newsletter (published on 9/20/13), just days ahead of the latest volatility pop we wrote:

"Since the end of last year, the VIX has experienced a price jump nearly every two months and as we've consistently noted, the S&P 500 has been making new highs, yet the VIX hasn't bottomed. This is a rather large discrepancy and the previous times stocks have made new highs without the VIX hitting new all-time lows, it warned of a short term market top. We think hedging volatility still makes sense and we're buying the DEC 2013 VIX call options at $540." (strike price reserved for subscribers)

The first leg of our VIX trade resulted in a 46% gain when we sold our December call options at $790. That's not a typo, nor is it an unusual return for our readers. From May 24 to June 20, we rode a similar surge in stock market volatility (VIXY - News), bagging an 84% gain on VIX related trades.

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Despite the inability of Washington D.C. to come up with a piecemeal deal, the Congressional Budget Office says the U.S. Treasury has enough cash flow to cover expenses and to avoid a debt default through Oct. 22.

In the meantime, owning the VIX (VXX - News) has been among the single best ways to profit from the political stalemate.

The ETF Profit Strategy Newsletter uses technical and fundamental analysis along with market history and common sense to be on the right side of the market. Since the beginning of the year, 74% of our weekly ETF picks have been winners and 525% was our biggest gainer.

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